United Kingdom Monetary Policy

United Kingdom: BoE leaves rates unchanged in October

October 8, 2015

At its 8 October meeting, the Monetary Policy Committee (MPC) of the Bank of England (BoE) decided to keep the Bank Rate unchanged at 0.50% and to leave the stock of asset purchasing at GBP 375 billion, as the markets had expected. Similar to the previous two meetings, only one member of the nine-member Committee voted in favor of increasing the Bank Rate by 25 basis points. The other members continued to see the current rate as appropriate considering the inflation outlook as well as the current state of the economy. The decision to leave the stock of asset purchasing unchanged, however, was taken unanimously.

In its analysis of domestic conditions, the BoE commented that recent economic data point to a mild deceleration of the economy in the second half of the year. The Bank considers the slowdown, “a natural consequence of the economy approaching a balance between its supply capacity and strengthening demand following the United Kingdom’s gradual recovery from the financial crisis.” In September, the manufacturing PMI dropped and data suggest a slight weakening in employment demand and therefore greater slack in the economy than expected.

In August, consumer prices recorded no change over the same month last year, coming in below from the 0.1% increase observed in July and remaining well below the Bank’s inflation target of 2.0%. August’s figure broadly reflected lower prices for imported goods and weak growth in domestic costs. The Bank added that, “with inflation below the target, and the likelihood that at least some spare capacity remains in the economy, the MPC intends to set monetary policy so as to ensure that growth is sufficient to absorb any remaining underutilised resources.”

The eight members who voted in favor of keeping the Bank Rate unchanged considered that the medium-term inflation outlook justified their stance. However, for the other member, the economic circumstances and the fact that monetary policy could be expected to operate with a lag continued to justify an immediate increase in the Bank Rate.

FocusEconomics Consensus Forecast panelists expect the Bank Rate to end the year at 1.09%. For 2016, the panel sees the Bank Rate ending the year at 1.66%.

Author:Dirina Mançellari, Senior Economist

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